Rising Gold Prices Amidst U.S. Economic Concerns
According to a recent analysis by Goldman Sachs, the increasing trade tensions and growing worries about the U.S. government’s fiscal health are expected to significantly boost gold prices in the upcoming year.
In late October, gold reached a record intraday high of $2,790, reported by the World Gold Council in its quarterly demand trend report, which indicated that market dynamics were heavily influenced by a widespread fear of missing out (FOMO). However, prices have since declined throughout November, with gold currently trading around $2,600.
A research note from Goldman Sachs on their 2025 commodities outlook released this Sunday suggests that the post-U.S. election price stabilization of gold, which saw speculative highs diminish, presents a favorable opportunity for investment in the metal.
The firm anticipates a strong, sustained demand for gold among central banks intending to diversify their reserves more permanently away from U.S. dollars, especially after the Biden administration’s decision to freeze Russian assets due to the Ukraine conflict. Central banks now regard gold as a politically neutral asset that is less likely to be frozen due to international conflicts.
Goldman Sachs also predicts that exchange-traded funds (ETFs) will contribute to pushing gold prices higher due to cyclical inflows from investors who are hedging their portfolios in anticipation of the Federal Reserve’s expected interest rate reduction to between 3.25% and 3.5% next year.
Potential Spike in Gold Prices to $3,150 by End of 2025
Goldman Sachs projects that by the end of the next year, gold should be valued at around $3,000 per ounce. However, they now believe that ongoing geopolitical tensions and the unconventional policy decisions and Cabinet picks by Trump’s transition team might drive speculators back into the market.
These speculators, recently less active, could drive the price of gold up to $3,150 per ounce as they wager on the U.S. economy imposing new punitive tariffs on its trading partners while grappling with its substantial fiscal deficits.
Gold Reflecting Distrust in Government-Backed Paper Currencies
The U.S. faced a $1.83 trillion budget deficit in the fiscal year ending in September, which necessitated additional borrowing. This could potentially lead to inflation if the Federal Reserve needs to buy more U.S. Treasury notes with newly printed money.
Goldman Sachs noted that rising inflation fears and fiscal uncertainties might boost speculative trading and ETF investments in gold. Furthermore, concerns over the sustainability of U.S. debt may prompt central banks, particularly those with large U.S. Treasury holdings, to increase their gold reserves.
Other factors, such as central banks adjusting their gold reserve allocations or demand from major jewelry markets like India, can also influence gold purchasing. Generally, a significant rise in gold prices during uncertain times is often seen as a lack of confidence in the U.S. dollar and other fiat currencies.
Trump’s Tariff Policies Could Cost U.S. Households
Concerns are mounting that Trump’s potential second term might lead to higher consumer prices due to his preference for imposing tariffs on imports like steel, possibly justified by national security threats to enact them unilaterally through executive orders.
Goldman Sachs points out that if Trump imposes widespread tariffs, including a potential 20% on all imports and an extreme 60% on Chinese goods, it could increase annual expenses for U.S. households by an average of $2,600, according to estimates from the Peterson Institute for International Economics.
Challenges to Federal Reserve’s Independence
Adding to the economic turmoil is the stagnation of the World Trade Organization’s Appellate Body, which has been inactive since December 2019 due to the U.S. blocking new appointments under Trump. This situation could complicate international disputes over his trade policies.
Moreover, Trump’s actions suggest a move towards reducing the Federal Reserve’s independence by integrating it more directly with the White House’s policy decisions. This blurring of lines between fiscal and monetary policy, seen in countries like Turkey, often leads to rampant inflation.
As these economic pressures mount, gold prices have surged, with the price of a standard 400-ounce gold bar reaching $1 million recently.
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Jamie Prescott specialises in economic journalism, breaking down complex topics like global trade and finance into digestible stories. Jamie helps readers stay informed about the economy and its impact on local communities.
